Different Types Of Mutual Funds
Key Highlights
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Mutual funds pool money from investors and invest in various assets. Mutual funds in India are categorised based on factors such as maturity period, principal investment, and asset allocation.
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Categories based on the maturity period include open ended funds having no set maturity date, close ended funds accessible only during launch, and interval Funds allowing exchanges at specific intervals.
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On the basis of principal investment are mainly divided into three categories. They are equity funds, debt funds and hybrid funds. Each of these categories is further divided into various categories based on the assets they invest in.
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The different categories based on asset allocation under Hybrid Funds include balanced hybrid funds, aggressive hybrid funds, and dynamic Asset allocation funds.
Types of Mutual Funds in India
There are various types of mutual funds. They enable investors to follow different investing strategies depending on their objectives and risk tolerance. They are divided into different categories based on various parameters. The following are the key types of mutual funds available in India.
Mutual Fund Schemes Based on Maturity Period
Types of mutual fund schemes based on the maturity period are as follows-
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Open Ended Funds: Investors in this scheme are free to purchase or sell units at any time. It also doesn't have a set maturity date. Liquidity is a crucial component. You may easily buy or sell your units at prices proportional to your net asset value (NAV). Open-end funds comprise the bulk of all mutual funds.
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Close Ended Funds: Investors may only participate in this type of fund during its launch. It is known as a New Fund Offer (NFO). NFO funds have a set maturity time. There are no more investments allowed once the deal closes. Several market variables may cause the market price to differ from the scheme's Net Asset Value (NAV). These include expectations from unit holders along with the supply and demand.
You may sell your units directly to mutual funds through periodic buybacks at NAV-related prices in some closed-end schemes. As per SEBI regulations, the investor can access at least one of the two exit options.
- Interval Funds: The funds allow investors to exchange units at specific intervals. They are a combination of both open and closed ended funds. They are available for sale or redemption at NAV-based prices. They might also be traded on the stock exchanges.
Mutual Fund Schemes Based on Principal Investment
Based on different investment principles, mutual funds are categories into the following types.
Types of Mutual Funds Based on Asset Class
Equity funds: These funds primarily invest in stocks and aim for capital appreciation over the long term. They are suitable for investors with a higher risk tolerance and a longer investment horizon.
Debt funds: These funds invest in fixed-income securities such as bonds, treasury bills, and other debt instruments. They are ideal for conservative investors seeking stable returns and lower risk.
Hybrid funds: Also known as balanced funds, these invest in a mix of equity and debt instruments to balance risk and return. Hybrid funds are suitable for investors looking for a diversified portfolio.
Money market funds: These funds invest in short-term debt instruments like commercial paper and certificates of deposit. They offer high liquidity and are ideal for investors looking for a safe place to park their money temporarily.
Below is a tabular representation of the same:
| Asset Class | Description | Suitable for |
|---|---|---|
Equity funds | Invest primarily in stocks, aiming for long-term capital appreciation | Investors with higher risk tolerance and longer investment horizon |
Debt funds | Invest in fixed-income securities like bonds and treasury bills | Conservative investors seeking stable returns and lower risk |
Hybrid funds | Invest in a mix of equity and debt instruments to balance risk and return | Investors looking for a diversified portfolio |
Money market funds | Invest in short-term debt instruments like commercial paper and certificates of deposit | Investors seeking high liquidity and a safe place to park their funds |
- Equity Funds:
There are eleven categories in equity schemes. However, mutual fund companies can offer only ten categories. In addition, they must select between the value and contra funds. The criteria of Large Cap, Mid Cap, and Small Cap have also been provided by SEBI.
| Category | Description | Minimum Equity Investment | Investment Focus |
|---|---|---|---|
Multi Cap Fund | Spreads investments across companies of all sizes. They try to balance the stability and growth potential. | 65% | Large, Mid, Small Cap |
Large Cap Fund | Prioritises established blue-chip companies with proven track records and consistent dividends. They aim for steady returns. | 80% | Large Cap |
Large & Mid Cap Fund | Aims for a balanced mix of stability from large companies, and growth potential from mid-sized firms with higher growth prospects. | 35% Large, 35% Mid | Large & Mid Cap |
Mid Cap Fund | Focuses on mid-sized companies with significant growth potential. It has a higher risk compared to large cap funds but less than small cap funds. | 65% | Mid Cap |
Small Cap Fund | Targets smaller, high-growth companies with the potential for higher returns. However, it has a higher risk due to its smaller size and less established track records. | 65% | Small Cap |
Dividend Yield Fund | Prioritises companies with a history of consistent dividend payouts. It aims for regular income alongside potential capital appreciation. | 65% | Dividend-paying stocks |
Value Funds | Invests in undervalued stocks with strong fundamentals that are temporarily not performing well. It targets long-term capital appreciation through bargain hunting. | 65% | Value investing |
Contra Funds | Takes the opposite approach to the market. They invest in stocks that are currently unpopular. | 65% | Contrarian investing |
Focused Funds | Invests in a small, carefully chosen portfolio of stocks (multi, large, mid, small focus specified). They focus on specific assets that may outperform the market. | 65% | Limited number of stocks (max. 30) |
Sectoral/Thematic Funds | Focuses on a particular industry like technology or healthcare. | 80% | Specific sector or theme |
ELSS Funds | Invests primarily in equity with a 3-year lock-in period to qualify for tax benefits. It offers long-term wealth creation with tax advantages. | 80% | Tax-saving equity |
- Debt Funds:
Under the debt schemes, SEBI has determined 16 categories. The table below summarises the prominent ones.
| Category | Description | Minimum Investment | Risk Level |
|---|---|---|---|
Overnight Funds | Invests in highly liquid assets maturing within a day. | Overnight securities | Very Low |
Liquid Funds | Offers high liquidity and safety with maturity up to 91 days. They are good for short-term needs. | Debt & money market instruments | Very Low |
Ultra Short Duration Funds | They have a slightly higher risk than liquid funds. They invest in assets with maturity between 3-6 months and look for moderate returns. | Debt & money market instruments | Low |
Low Duration Funds | They have a longer maturity than ultra short funds (6-12 months). They usually offer higher returns with slightly higher risk. | Debt & money market instruments | Low |
Money Market Funds | Focuses on highly liquid money market instruments have a maximum maturity period of one year. They are suitable for capital preservation and stable returns. | Money market instruments | Low |
Short Duration Fund | Invest in instruments maturing within 1-3 years. They balance liquidity and the potential for higher returns. They have moderate risk. | Debt & money market instruments | Moderate |
Medium Duration Funds | Focuses on instruments with a maturity period of 3-4 years. They aim for higher returns than shorter-term funds. They are slightly risky though. | Debt & money market instruments | Moderate |
Medium to Long Duration Fund | Targets 4-7 year maturity range. They offer the potential for good returns. However, they are highly dependent on interest rates. | Debt & money market instruments | Moderate |
Long Duration Fund | Invest in bonds that mature beyond 7 years. They aim for maximum long-term capital appreciation. However, they are significantly impacted by interest rate fluctuations. | Debt & money market instruments | High |
Dynamic Bond Funds | Invests in assets with different maturity periods. They try to generate reasonable returns for investors . | Debt & money market instruments | Varies |
Corporate Bond Funds | Primarily invests in high-quality corporate bonds for stable income and potential capital appreciation. | Corporate bonds (highest rated) | Moderate |
Credit Risk Funds | Invests in lower-rated corporate bonds for potentially higher returns, with a low credit rating. | Corporate bonds (lower rated) | High |
Banking and PSU Fund | Invests in debt instruments issued by banks, public sector undertakings, and public financial institutions. They offer stable income and have moderate risk. | Bank, PSU, PFI debt instruments | Moderate |
Gilt Fund | Focuses on government securities (G-Secs) which are low-risk assets. Their maturity period usually varies. | Government securities | Low |
Gilt Fund with 10-year Constant Duration | Targets 10-year government bonds. They offer specific duration exposure and fixed returns. However, they are subject to interest rate changes. | G-Secs with 10-year maturity | Moderate |
Floater Fund | Invests in bonds with interest rates that depend on market rates. They offer protection against rising interest rates. However, returns may be limited. | Floating rate instruments | Low to Moderate |
- Hybrid Funds:
Mutual fund companies are limited to six categories under SEBI's Hybrid fund regulations. However, an asset management company (AMC) can only offer any 6 categories of hybrid plans. Moreover, they must select between the Balanced Hybrid Fund and the Aggressive Hybrid Fund.
| Category | Description | Debt Allocation | Equity Allocation |
|---|---|---|---|
Conservative Hybrid Funds | Primarily invests in debt instruments. They have a small equity portion for potential capital appreciation. | 75%-90% | 10%-25% |
Balanced Hybrid Funds (50:50) | Invests equally in equity and debt. They aim for a balance between growth and income with moderate risk. | 40%-60% | 40%-60% |
Aggressive Hybrid Funds | Focuses on equity with some debt for stability. They try to generate higher returns by taking more risk. | 20%-35% | 65%-80% |
Dynamic Asset Allocation Funds | Actively adjust equity and debt exposure based on market conditions. They aim for optimum returns based on market conditions. | Varies dynamically | Varies dynamically |
Multi-Asset Allocation Funds | Invests in at least three different asset classes like equity, debt, or foreign instruments, for diversification and growth potential. | Varies | Minimum 10% each in 3+ asset classes |
Arbitrage Funds | Utilises arbitrage strategies to use price differences between similar assets in different markets. They look for consistent but low-risk returns. | 35% (implicitly) | 65% |
Equity Savings Funds | Combine equity investments for growth with a minimum allocation to debt for income and potential downside protection. | 10% (minimum) | 65% |
- Solution oriented funds:
These funds usually focus on a specific objective of investors. There are commonly two types of funds in this category.
| Category | Description | Lock-in Period | Aim |
|---|---|---|---|
Retirement Fund | Invests with a long-term focus on capital appreciation to build a corpus for retirement income. The lock-in period ensures consistent investment and prevents premature withdrawals. | 5 years or retirement age (whichever is earlier) | Secure financial future at retirement |
Children's Fund | Offers a long-term investment horizon tailored for specific child-related goals. The lock-in period helps build sufficient funds. | 5 years or child's age of majority (whichever is earlier) | Provide for child's future education, marriage, or other needs |
Types of Mutual Funds Based on Investment Goals
Investors have different financial goals, and mutual funds cater to these diverse objectives. Here are some types of mutual funds based on investment goals -
Growth funds: These funds aim for capital appreciation by investing in companies with high growth potential. They are suitable for investors looking for long-term wealth creation.
Income funds: These funds focus on generating regular income through investments in dividend-paying stocks and interest-bearing securities. They are ideal for investors seeking a steady income stream.
Tax-saving funds: Also known as Equity Linked Savings Schemes (ELSS), these funds offer tax benefits under Section 80C of the Income Tax Act. They are suitable for investors looking to save on taxes while investing in equity markets.
Retirement funds: These funds are designed to help investors build a corpus for their retirement. They typically invest in a mix of equity and debt instruments to balance growth and stability.
Look at the below table for a comprehensive comparison:
| Investment Goal | Fund Type | Characteristics | Suitable for |
|---|---|---|---|
Capital Appreciation | Growth funds | Invest in companies with high growth potential; aim for long-term wealth creation | Investors seeking long-term wealth creation |
Regular Income | Income funds | Focus on generating regular income through interest-bearing securities and dividend-paying stocks | Investors seeking a steady income stream |
Tax Savings | Tax-saving funds (ELSS) | Offer tax benefits under Section 80C; invest primarily in equity markets | Investors looking to save on taxes while investing |
Retirement Corpus | Retirement funds | Designed to build a corpus for retirement; invest in a mix of equity and debt instruments | Investors planning for retirement |
Types of Mutual Funds Based on Risk
Risk tolerance varies among investors, and mutual funds cater to different risk profiles. Here are the primary types of mutual funds based on risk:
Low-risk funds: These funds invest in safe and stable instruments like government securities and high-rated corporate bonds. They are suitable for risk-averse investors seeking capital preservation.
Moderate-risk funds: These funds invest in a mix of equity and debt instruments to balance risk and return. They are ideal for investors willing to take moderate risks for better returns.
High-risk funds: These funds primarily invest in equities and are suitable for aggressive investors with a high-risk tolerance. They aim for higher returns but come with greater volatility.
Below is a comparison of mutual fund types based on risk:
| Risk Level | Fund Type | Characteristics | Suitable for |
|---|---|---|---|
Low risk | Debt funds | Invest in fixed-income securities; low volatility | Conservative investors |
Moderate risk | Hybrid funds | Mix of equity and debt; balanced risk and return | Balanced investors |
High risk | Equity funds | Invest in stocks; high potential returns and volatility | Aggressive investors |
Conclusion
The mutual funds offer a diverse range of investment options. They cater to various financial needs of investors. Mutual funds are mainly categorised on the basis of their maturity period and the assets they invest in. Based on the maturity period, there are three types of funds. They're open-ended equity funds, debt and hybrid funds. Debt, hybrid, and equity funds are the three types of mutual funds based on asset allocation. Each of these types are again divided into various categories. The vast array of mutual funds in India provides investors flexibility and diversification. You can choose the ones that suit your risk tolerance and help in achieving the investment objectives.
FAQs on Different Types of Mutual Funds
What type of mutual fund is best?
The best type of mutual fund depends on your investment objectives and risk appetite. Different mutual funds have different risk-reward ratios. So, you can invest in a mutual fund that suits your long term goals.
Which type of mutual fund is safest?
Debt funds and bond funds are usually the safest mutual funds. They invest in debt instruments and government bonds, which have very low risk as they are backed by central governments.
Which type of MF gives highest return?
Small and mid-cap funds generally provide higher returns. However, the returns on any type of mutual funds is not guaranteed. So, it is wise to invest as per your risk tolerance levels.
